Debenture holders of the Nova PropGrow (the old Nova Property Group) should be cautious in their evaluation of the proposed Scheme of Arrangement, as it proposes a very complex transaction which will have a significant impact on the value and recoverability of their original Sharemax investments.
Moneyweb conducted an intensive analysis of the proposed scheme and identified several issues that may not be in the best interest of debenture holders. The most notable arise that the listing of the group is not a condition for the Section 155 Scheme of Arrangement, and neither is the transfer of the underlying properties to the newly-listed company.
It is also apparent that without more information it is highly unlikely that Nova would be listed soon.
Here are the main concerns which need to be addressed before such a listing will be approved.
Section 155 or 114?
One of the most critical aspects of the proposed scheme is the legal definition of the debentures that around 18 000 former Sharemax investors own.
The Nova board proposes the scheme under Section 155 of the Companies Act, which deals with the business rescue of companies and especially the compromise with trade creditors. Within this context, Nova regards its obligation to repay debentures in the same light as paying other trade creditors such as Telkom, security firms and cleaning services.
The legal advice Moneyweb received from legal and forensic accounting specialists, suggests that debenture holders have more pronounced rights than those of trade creditors. The Companies Act includes debentures in its definition of securities and so it would seem more prudent to have proposed the Scheme of Arrangement under Section 114 of the Companies Act, which guides the interaction between a board and holders of securities during a restructuring.
This is important as Section 114 prescribes that the board must commission an independent, fair and reasonable statement to assist holders of the securities to take informed decisions. This is not necessary under Section 155 of the Act and it seems as if Nova has gone to great lengths to avoid the onerous provisions of Section 114, by now describing their debenture holders as normal creditors.
Section 114 was enacted precisely to protect debenture holders in circumstances like this, but with the shortcomings in the proposed Scheme of Arrangement, it is hard to see how an independent advisor would recommend the scheme in its current form. Without a fair and reasonable assessment from an independent valuer, the debenture holders have nothing to base their investment decision on.
While Nova generally does not respond to Moneyweb questions, CEO Dominique Haese responded to a question relating to the selection of Section 155: “The Nova Group took extensive independent legal and corporate advisory advice pertaining to the Scheme of Arrangement and listing structure and process it has embarked upon and is comfortable that it is dealing with the process in the most appropriate manner and in accordance with the correct legal requirements.
“Section 155 requires a liquidation dividend scenario to be sketched. This was done for such reason, only. No liquidation process of the company is contemplated.”
It seems as if this answer misses the point. Haese states that there is no liquidation scenario and therefore shows that Nova is using the wrong section.
Moneyweb put a similar question to Derek Cohen, the sole trustee of the Nova Debenture Trust. Cohen stated via his attorney Zwiegers Attorneys that he only has an administrative role as the trustee of the trust and could not pronounce on the correct definition of a debenture. He also stated that he is not authorised in terms of the FAIS Act to provide an opinion related to the proposed scheme, as it could be construed as financial advice.
Cohen did however state that the receivers (Myburgh and Hans Klopper) informed him that the debentures issued to the former Sharemax investors were not debentures “in the sense envisaged in either the Companies Act 1973 or the Companies Act 2008”. The reason for this, according to the receivers, was because the debentures do not entitle the holder to payment of principal or interest; instead each debenture is linked to a specific property in terms of the scheme.
However, this seems to contradict the Nova Debenture Trust deed, which clearly states that debentures were issued in terms of the new Companies Act. One of these documents is therefore erroneous in their definition of a debenture.
Critical conditions are absent
Another concern with the proposed Scheme of Arrangement is the absence of two key preconditions for the scheme. The first is the actual listing on the JSE of the shares to be issued in exchange for the debentures and the second the acquisition by this company of all the ordinary shares of Nova PropGrow, so as to effectively transfer indirect ownership of the underlying properties to the listed companies.
Let’s start with the listing.
The scheme documentation and all communication from Nova to debenture holders sings the praises of the listing and claims it would allow them to sell their shares upon the listing and therefore liquidate at least a portion of their investments.
Unfortunately, the listing of the company is not a condition for the scheme. If approved, the scheme will continue even if the listing is delayed or rejected. This means that debenture holders will receive shares in an unlisted entity where trading of shares will be very illiquid.
This brings into play a second absent condition, the lack of a condition to transfer the shares of Nova PropGrow to the listed entity.
Under the scheme the debenture holders will relinquish all the rights of their debentures – which are linked to individual properties within Nova PropGrow – and receive shares in a new company.
There is however no provision or condition in the scheme documentation that the properties (or the shares of NovaPropGro) will be transferred to the listed entity.
A scenario, therefore, exists that if the scheme is approved, the debenture holders will receive shares in a company which may never list and may no longer own the original underlying properties. The unlisted company’s only asset would be a loan agreement with Nova PropGrow and/or Nova Investments.
Dilution of value
Nova debenture holders will also see a significant dilution of their rights and the value of their investments. Currently, debenture holders hold preferential rights over other creditors and would be paid first before other creditors in a liquidation scenario.
Under the new proposal, these preferential rights will fall away. Once debenture holders swap their debentures for shares, they will have no further claims against Nova for their initial Sharemax investments.
Furthermore, the number of shares investors will receive for their debentures is determined by a special formula linked to the underlying properties. This conversion ratio varies significantly between the different properties. Some debenture holders may receive shares to the value of more than 85% of the value of their debentures, while others will receive much less.
The investors in the Villa and Zambezi – the two single largest properties in the group – may be the most aggrieved, as they will only receive shares to the value of 15% and 20% of their original investments.
What should investors do?
Although the proposal of a listing is not a bad idea, it seems as if the proposed Scheme of Arrangement will not unlock as much value for debenture holders as it could. Clarity is needed about the rights of debenture holders. In addition, a successful listing and a scheme of arrangement to acquire all the shares in Nova PropGrow should be made an absolute condition for the scheme to continue.
The director shareholders of NovaPropGro, who collectively own 87% of the shares, should at the very least, provide irrevocable undertakings to swap their shares into the to-be-listed company.
The lack of these two conditions could make it possible for debenture holders to end up owning shares in an unlisted entity which does not own the underlying properties they invested in. It would be a significant dilution of their rights and the values of their investments.
Investors should make every attempt to attend the meeting on November 10 in Pretoria, or if debenture holders cannot attend, provide proxies to individuals who can. There are serious questions to be asked.
Much more to follow.
A response from Dominique Haese, CEO of Nova:
Dear Mr van Niekerk,
It is regrettable that our efforts in engaging Moneyweb openly, constructively and in a bona vide fashion has not been reciprocated. In response Moneyweb has chosen to publish articles without prior reference to us, and in breach of your undertaking to allow us to see and comment on the articles first, which articles twist the facts, articulate a number of inaccuracies and untruths and seek to slander and defame the Nova Group and its directorate. We are considering our position and our rights in this regard are reserved.
It has become clear to us that any information that is provided by us to Moneyweb, will be twisted and used out of context for the purpose of further negative reporting of and concerning the Nova Group and its directorate and given that no further productive purpose would be served in engaging with Moneyweb, the Nova Group has decided to break off all forms of communication with Moneyweb.
We will accordingly no longer respond to questions Moneyweb pose to us, requests for commentary on proposed articles or for that matter to any articles that Moneyweb might publish, subject of course to a reservation of the right to deal with any matter Moneyweb might publish, in a court of law.
Please ensure, should you elect to publish anything further regarding the Nova Group and any of its functionaries, that you include in such publication our above position, verbatim.
CEO Nova Property Group